Oil and Gas for the Surface Developer: Will the Oil and Gas Company Drill on My Property?
July 31, 2023
By: Katie A. Moisan
In oil and gas-producing states like Colorado, commercial and residential developers often purchase property in which a separate entity owns the underlying minerals. Developers in the due diligence phase of an acquisition may ask what rights an oil and gas operator has to drill on the surface of the property and whether such drilling is likely. If you purchase surface property, it is important to know the rights of the mineral owner and your rights as the surface owner. This article highlights some of the key doctrines to be aware of as you conduct your due diligence. It also provides tools to protect your surface interests.
The Dominant Estate Doctrine
The tension between the surface and the mineral owner began in the early days of oil and gas exploration. Landowners severed the mineral estate, conveying those minerals to the wildcatters of the time. Practically speaking, the owner of severed minerals cannot access its property without use of the surface estate. In an era where the United States shifted its energy reliance, policymakers resolved the issue by adopting the general rule that the mineral estate is the dominant estate (“Dominant Estate Doctrine”). This means that the mineral owner and its lessee has the right to use the surface for purposes of “accessing, exploring, drilling, and using the surface” to the extent “reasonable and necessary for the development of the mineral interest.”i The mineral owner therefore has an implied easement of ingress and egress over and across the property to access its minerals. Further, subject to limitations imposed by case law and state regulations, the surface owner cannot prohibit the mineral owner or its lessee from developing those minerals. This right to access and development is limited, as noted above, to what is “reasonable and necessary.”
The Accommodation Doctrine
The Dominant Estate Doctrine did not give unlimited rights to mineral owners. Instead, those in power recognized the importance of balancing energy independence with prohibition of waste. Perhaps the most notorious example of such waste is that of Spindletop oil field in Texas. In the early twentieth century, the excitement of the oil boom led to overproduction of this field, at one point producing over 100,000 barrels of oil a day.ii Geysers littered the landscape, polluting nearby fields and water sources. Moreover, the oil field supply drastically plummeted given the misuse of the reservoir. Policymakers recognized the need to balance the rights of the surface owner and nearby landowners, along with protecting the geological formation and its production capabilities. Over time, various jurisdictions gradually developed what is known as the “Accommodation Doctrine.” In 1971, the Texas Supreme Court formally upheld the Accommodation Doctrine in its landmark case, Getty Oil Co. v. Jones.iii The Court considered whether an oil and gas operator exceeded its rights as mineral owner when it installed pumping units that interfered with the farmer’s sprinkler system on the property. The farmer introduced evidence that the sprinkler system was the farmer’s only method of irrigating his farm, and further that the oil company had an alternative solution by placing the pumping units below the surface so as not to interfere with the sprinkler system. The Texas Supreme Court held the following:
“[W]here there is an existing use by the surface owner which would otherwise be precluded or impaired, and where under established practices in the industry there are alternatives available to the lessee whereby the minerals can be recovered, the rules of reasonable usage of the surface may require the adoption of an alternative by the lessee.”iv
In other words, if a mineral owner’s proposed use prohibits or harms a pre-existing surface use, and a reasonable alternative exists for the mineral owner, the Accommodation Doctrine requires that the mineral owner use that alternative to protect the surface owner’s interest. The Texas Supreme Court is clear, however, that if no alternative exists, “[t]he lessee has the right to pursue this use, regardless of surface damage.”v
Colorado courts have subsequently adopted the Accommodation Doctrine. In Gerrity Oil & Gas Corp. v. Magness, 946 P.2d 913 (Colo. 1997), the Colorado Supreme Court considered what evidence would be needed to support a claim that an operator had exceeded its reasonable surface use under the Accommodation Doctrine, amounting to a trespass claim. The Court adopted a three-step approach, requiring the following:
- The surface owner must show “that the operator’s surface use materially interfered with surface uses;”
- The operator must show that “its operations conformed to standard customs and practices in the industry;” and
- If the operator does show that such practices are in line with industry standards, the surface owner should then present evidence “that reasonable alternatives were available to the operator at the time of the alleged trespass.”vi
In the recent July 2023 case, Bay v. Anadarko E&P Onshore LLC, 2023 WL 4571430, the Tenth Circuit upheld the Gerrity test. Here, the surface owner alleged that because the oil and gas company had drilled multiple vertical wells on its property, rather than combining the wellheads and drilling only two horizontal wells, the operator had exceeded its rights and trespassed on the property. After years of litigation, the Tenth Circuit held that the operator acted within its scope of rights. In specific, it upheld the District Court’s reasoning that the surface owner failed to show that the operator’s use materially interfered with the surface owner’s use. The surface owner testified that he continued to use the land for agriculture, but that the operator’s activities led to increased weed growth, noise pollution, and damaged the sprinkler system, amongst other alleged issues. The Tenth Circuit held that the issues above amounted to inconveniences but did not “establish a prima facie showing of material interference.”vii Because the surface owner continued to use the surface in accordance with its pre-existing use, no trespass by the operator occurred.
What does all of this mean for a surface developer?
Rights of the surface owner are subservient to the mineral owner, but those rights are not lost. The mineral owner and operator lessee have the right to access and develop the surface of your property to extract the minerals, but if their operations preclude or materially impair your surface use, they must show that they have no reasonable alternatives available. As with other issues of land use, the intent here is to use the land in a manner that best captures and protects its resources, while upholding the property rights of all parties involved. Each situation is fact-specific and handled on a case-by-case basis. If you have questions regarding the oil and gas operations on your property, you should consult with an attorney.
Tools to Consider
a. Surface Restrictions and Surface Use Agreements
After receiving your title commitment, you should review all instruments of title and search for a no-surface occupancy clause. This clause typically appears in either a mineral deed or an oil and gas lease, and it usually prohibits drilling on the surface of your property. The operator may still drill horizontal wellbores underneath the property. If this clause exists within a deed, it will likely run with the land, restricting surface operations by the mineral owner’s successors in interest. If this clause exists within the oil and gas lease, it will only be applicable so long as the lease remains in its primary term or is held by production. Once the lease terminates or expires, this limitation will no longer apply to your property.
Ideally, you may come across a surface use agreement in your title. This is a contractual arrangement between the mineral owner (or operator) and surface owner. Surface use agreements aim to define the rights and responsibilities of each party, including compensation and surface damage mitigation. These agreements typically limit surface operations by a lessee to a specific area. They may or may not run with the land, depending on how the agreements are drafted, and they may be specific to a certain operator and its successors. Most importantly, surface use agreements establish a framework for harmonious coexistence between the surface and mineral owner. If your title does not contain a surface use agreement, you may explore with an attorney whether you have any leverage to negotiate. If you are purchasing land in which the grantor is reserving the minerals, you may require a surface use agreement as a condition of closing.
b. Colorado Setback Rules
Finally, Colorado’s setback rules may be in your favor depending on your development plans. Per the Colorado Energy and Carbon Management Commission’s Rule 604, Colorado’s setback rule for new well pads is one of the largest in the country.viii Rule 604(a) states that operators may not drill new well pad surface locations within 2,000 feet from existing homes and schools. Operators may still apply for variances, showing by necessity that certain hardships require them to drill at least 500-feet away from these buildings. If your planned development includes residential units or schools, this may be your best form of defense in securing your surface use from new oil and gas facilities. In addition, you should check with your local codes, rules, and regulations to determine whether the jurisdiction where the property is located has any setback requirements. Counties and municipalities often have setback rules for new development projects in relation to existing oil and gas operations. As with other land use codes, your development will need to comply with the local jurisdiction’s setback rules governing new development and setbacks from existing oil and gas production facilities.
Takeaways
In a perfect world, surface developers and oil and gas operators have a lot in common. Both want to be good stewards of the available resources and use the land to benefit the local community. Unfortunately, the plans of a surface developer and an operator often clash, and problems arise. In order to prevent unexpected property disputes, a surface developer should be aware of the rights it has in relationship to the mineral owner. Prior to purchase, the developer should conduct its due diligence on the property and explore, what, if any, surface restrictions are in place so that it can reasonably anticipate future oil and gas development.
i Gerrity Oil & Gas Corp. v. Magness, 946 P.2d 913, 927 (Colo. 1997).
ii Robert Wooster and Christine Moor Sanders, Spindletop Oilfield, (originally published in 1976; updated April 2, 2019) https://www.tshaonline.org/handbook/entries/spindletop-oilfield.
iii Getty Oil Co. v Jones, 470 S.W.2d 618 (Tex. 1971).
iv Getty Oil Co., 470 S.W.2d at 622.
v Id. (referencing Kenny v. Texas Gulf Sulphur Co., 351 S.W.2d 612 (Tex.Civ.App. – Waco 1961).
vi Gerrity Oil and Gas Corp., 946 P.2d at 920, 933.
vii Bay v. Anadarko E&P Onshore LLC, 2023 WL 4571430 (July 18, 2023).
viii The Colorado Energy and Carbon Management Commission was formerly known as the Colorado Oil and Gas Conservation Commission, or the “COGCC.”